The definition and branches of economics

Economics is the study of how limited resources can be distributed in the most effective manner to meet various needs.

Microeconomics and macroeconomics

Economics is divided into two main areas:

• Microeconomics - Focuses on specific markets and examines the actions and choices of individual consumers (households) and businesses (firms), including how they engage with each other. For instance, it explores reasons why people might choose particular mobile phones over alternatives.
• Macroeconomics - Examines the economy as a whole or groups of economies, including interactions between consumers and firms on a larger scale. It often involves government actions. An example is analysing why the economy of one nation expands more quickly than another's.

In some cases, the lines between microeconomics and macroeconomics overlap, since some market activities can influence the wider economy. For example, a rise in demand for farm goods in one market could impact a country's overall trade balances through exports and imports.

Economics as a social science and its methods

Economics is classified as a social science because it investigates human behaviour, especially concerning the fulfilment of needs and desires.

Scientific aspects of economics

Like other sciences, economics involves proposing and testing theories through a structured approach: identifying issues, suggesting explanations, examining them, and then confirming or dismissing them.

The role of models in economics

Economic theories are frequently presented as models, which are basic representations of real events, often using mathematical formats. Models are useful because they can be applied repeatedly to evaluate theories across various situations.

Positive and normative statements

Economic statements can be divided into those based purely on facts and those that include opinions or judgements.

Positive statements

Positive statements are objective and based on verifiable facts, without any personal views.

Examples of positive statements:

• A reduction in the availability of natural gas causes its price to rise.
• Visitor numbers to Thailand increasing by 15% has led to 15% more jobs.
• Higher taxes on motorcycles cause a drop in their sales.
• The rate of inflation stood at 6% in 2023.

Normative statements

Normative statements involve value judgements or opinions about what ought to happen.

Examples of normative statements:

• A fall in natural gas supply ought to result in higher prices.
• A 15% rise in visitors to Thailand is likely to create at least 20% more positions in hospitality.
• Raising taxes on motorcycles might result in a fall in demand for new motorcycles.
• Inflation at 6% in 2023 was the worst in 8 years.

Key economic concepts of ceteris paribus and the margin

Economists use specific tools to simplify complex situations and analyse changes.

Ceteris paribus

Ceteris paribus is a Latin phrase meaning 'all other things being equal' or unchanged. It enables economists to isolate the effect of one variable by assuming no other factors alter, making it easier to model outcomes from a single adjustment.

The margin

The margin refers to small adjustments in variables, a concept used in microeconomics to assess how minor shifts in one element affect others, helping predict the results of changes.

Decision-making at the margin

Choices by consumers, firms, and governments often occur at the margin, weighing the benefits and costs of small additional changes. For example, a producer might continue making extra items until the income from one more unit matches its production cost.

Time periods in economics

Economic analysis considers different time frames, which vary depending on whether factors of production can be adjusted, rather than fixed durations like months or years.

Types of time periods

• Short run - A period where only certain inputs, such as workforce levels, can be varied, while others like equipment remain fixed.
• Long run - A timeframe allowing all factors of production, including capital, to be altered. For instance, a firm could build a new plant to enhance output capacity.
• Very long run - An extended period where not just production factors but also broader elements like technology, laws, and societal priorities can change.